Debt Management 101 ─ How Do Bankruptcy Exemptions Work?

What will you do if there’s a growing stack of unpaid invoices and creditors are constantly harassing you? You’re giving it your all, yet it’s not enough. Perhaps you’re experiencing a financial crisis, such as astronomical hospital bills, and your debt keeps growing.

If you can’t pay your bills and don’t want to get into debt further, filing for bankruptcy may help. The federal government has created bankruptcy exemptions to assist you in getting back on your feet after financial hardship.

A Quick Bankruptcy Primer

Under the Bankruptcy Code, when you declare bankruptcy, you can choose between Chapter 7 bankruptcy and Chapter 13 bankruptcy. Nevertheless, Chapter 11 is the most common form of bankruptcy for businesses.

Your house, car, jewelry, and household goods form part of your bankruptcy estate. Therefore, they may be liquidated to repay your creditors unless they fall under one of the several exemption categories.

In Chapter 7, the bankruptcy trustee is responsible for liquidating your nonexempt assets and returning the proceeds to your creditors. Chapter 7 bankruptcy with the help of Stiberman Law is the best option if you have few or no nonexempt assets and few or no nonexempt debts.

You get to keep your belongings in a Chapter 13 bankruptcy, but you have to come up with a three-to-five-year payment plan to pay back your debts. Your nonexempt assets are worth the amount you’re required to repay. This plan works best if you have adequate income to finance the payment plan.

What Bankruptcy Exemptions Mean


If you intend to file for bankruptcy, laws known as ‘bankruptcy exemptions’ may apply. Federal and state governments have rules protecting certain assets from being liquidated during bankruptcy. Exemptions provided by state law can protect your assets from creditors even if you don’t file for bankruptcy.

An exemption prevents the sale of the exempt property to pay off unsecured creditors. It would be best if you claimed the necessary exemptions to protect your assets when declaring bankruptcy. The trustee will be able to liquidate your property if you file for bankruptcy but don’t claim any exemptions.

How Bankruptcy Exemptions Work For You

The amount of property protected by exemptions remains constant regardless of the kind of bankruptcy filed. Nonexempt property is defined as anything which a bankruptcy exemption cannot protect. Whether a Chapter 7 or Chapter 13 bankruptcy is filed will determine what happens to ‘nonexempt’ property.

Chapter 7 Bankruptcy

A trustee in bankruptcy is a neutral third party appointed by the bankruptcy court to liquidate debtors’ ‘nonexempt’ assets or those not covered by bankruptcy exemptions and distribute the proceeds to creditors.

However, just because you declare bankruptcy doesn’t mean you have to give up everything. Exemptions listed under bankruptcy law allow you to keep enough assets after filing.

If you have an exemption that would prevent the sale of an asset, the Chapter 7 trustee cannot sell it. The value of your assets and the available exemptions will determine how much of them survive a Chapter 7 liquidation. As a result of exemptions, most Chapter 7 debtors may keep all or most of their possessions.

Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy will allow you to keep your property while making payments on your debt over three to five years. The advantage, however, doesn’t come without a price. All debts incurred by creditors not exempt from a payment must be settled out of the property you own.

In the event of bankruptcy, nonpriority unsecured creditors, such as those holding credit card debt, are entitled to at least the value of the nonexempt assets. Consequently, excluding all or most of your assets is crucial to keeping your Chapter 13 plan payment modest.

Properties Protected By Bankruptcy Exemptions Or Exempt Properties


Many forms of property are equally protected by both federal and state law. Some examples are the following:

  • Home or dwelling
  • Personal property including household goods, furniture, and musical instruments
  • Devices to support the disabled or ill
  • Cars and other vehicles
  • Trade-specific equipment
  • Assets set aside for old age, such as 401(k)s and IRA
  • Having some form of life insurance
  • Benefits from the Social Security System
  • Compensation for lost wages, disability, and unemployment
  • Benefits for veterans and other members of the public
  • Child support and spousal maintenance payments
  • Compensation or money was given to victims of accidents or crimes

In essence, bankruptcy laws will save your most essential belongings. A ‘wildcard exemption’ is included in several state exemption laws and federal bankruptcy exemptions. A ‘wildcard’ exception may be employed to protect assets that don’t qualify for any other exemption.

The implications of this may vary from state to state. The law of the state in which you have been a resident for at least two years will inform you of two things:

  • What is protected from creditors under the state’s bankruptcy laws?
  • Whether or not you qualify for bankruptcy exemptions under federal law.

Properties Not Protected By Bankruptcy Exemptions Or Non-Exempt Properties


In Chapter 7, the trustee is authorized to liquidate nonexempt assets to repay debtors. The amount owed to unsecured creditors in a Chapter 13 bankruptcy case is calculated by deducting the value of exempt assets.

In bankruptcy, the non-exempt property typically includes the following:

  • Like holiday homes, houses that aren’t primary residences are referred to as ‘secondary residences
  • Miscellaneous vehicles, except if spouses are filing jointly, in which case both spouses can deduct one vehicle
  • Assets outside of 401(k)s
  • Luxurious items of garments, such as a fur coat, that aren’t handmade
  • Watercraft, all-terrain vehicles (ATVs), and other recreational vehicles
  • Pieces of expensive jewelry
  • Instruments for making music that isn’t essential to your livelihood
  • Additional TVs, appliances or gadgets
  • Expensive stamp or coin collections or other hobby supplies
  • Treasured heirlooms handed down through the generations

A debt relief expert can help you determine whether or not one of your assets is exempt from bankruptcy. The state exemption list can also be consulted. Unless specified otherwise, any personal property not included is considered non-exempt.


In Summary

To summarize everything in this article, those who file for bankruptcy under Chapter 7 or Chapter 13 may be able to protect important assets by claiming an exemption. The asset covered by the exemption won’t be liquidated to satisfy a creditor’s claim in a Chapter 7 case or included in the calculation of a Chapter 13 debtor’s payment obligation.

The vast majority of exemptions are only valid for certain categories of property. Your principal residence and your car both qualify for separate tax breaks. The debtor may also claim a ‘wildcard exemption,’ the value of which may be used for any property. A property’s value may be protected depending on its market price and the exemption amount.

Luxurious possessions are less likely to be exempted than essentials. Your luxury items, such as a second home, sports car, jewelry, or fancy watch, may not be covered. Instead of declaring bankruptcy, you could sell some of these assets to settle your debts. Although there’s no legal way to exempt a pet, the trustee is unlikely to sell it unless your pet is really valuable.